The Benefits of an Employee Referral Program

When you’re on the hunt for the best talent, it’s tempting to take advantage of one of your largest potential sources of new employees — your current ones. While your employees can open doors to new recruiting channels, there are advantages and disadvantages to rewarding current employees for recruiting people in their networks. Here’s how to figure out whether bringing an employee referral program into your talent acquisition strategy makes sense for your company.

The Benefits of a Referral Program

Referral programs can be a boon for employers. In fact, more than one-third of employees say they got their current jobs through a referral, according to a 2017 PayScale survey. PayScale found that not only do referred employees tend to be more engaged and satisfied with their jobs, but they’re also more loyal and less likely to leave within their first six months. Referrals can help you find people who fit well with a department’s culture or work habits, which could account for referred employees’ longevity.

Of course, the longer someone stays with the company, the more money you save in hiring expenses. On the whole, referrals can lower recruitment costs. Yes, bonus-based referral programs do involve spending money. But even if you pay a $100 referral bonus — or more — you’ll still come out ahead compared to the costs of recruitment. Outside recruiting agencies typically charge 15 percent of a first-year salary, while other fields have even higher rates. Software engineer Chuck Groom notes that technology recruiters can charge up to 25 percent of a first-year salary. There’s also the cost of staff time — time spent going to recruiting fairs and scanning LinkedIn for matches. In fact, LinkedIn found that referrals can cut hiring time from 55 days to just 29. In these situations, even a $5,000 referral would end up being the less expensive option. A referral program can also give HR access to a pool of passive candidates who may only consider a new opportunity if someone they trust calls their attention to it.

All that said, a word of caution: Statistics show that referral programs aren’t always great for hiring a diverse workforce. If you’re setting up a program, you’ll want to make sure that female and minority employees are encouraged to participate. You can help promote diversity by not giving preferential treatment to referred candidates — treat everyone who applies for a job the same.

Tips for Setting Up a Successful Program

Your ultimate goal should be to have an employee referral strategy that’s easy to navigate. If the program is too complicated or involves too much paperwork, employees might shy away from it. Set clear expectations for when employees will receive referral bonuses — one option is to pay part of the bonus on the hire date and the rest after the hire has been employed for three to six months — and explain that you’ll accept referrals at any time, not just when there are job openings. For the referral itself, have one standard form everyone submits, whether it’s on paper or online. The form should include the candidate’s name and contact details, the referring employee’s name and which job openings they might recommend.

When you’re starting a program, clearly outline your policies and procedures from the beginning. Otherwise, employees might get disappointed and stop sending in referrals. This includes making sure employees know that not every referred candidate will get a phone call or interview — or, depending on your setup, result in a bonus. Communicate regularly with management to gauge their support of the program, since their attitude can affect whether employees participate. You’ll also want to talk with your attorney to make sure everything you’re doing complies with legal hiring requirements.

Pricing the bonus amount for referrals can be a little tricky. It’s probably best to start low enough that you can raise it later if necessary, while offering an amount still high enough to incentivize employees. The U.S. Office of Personnel Management lists one option as tiered: $50 for the first referral, $100 for the second and on up. To ensure you’re saving money, they also suggest finding the average cost of recruiting an employee and making the referral a percentage of that cost. The important detail is setting up clear expectations for what employees will receive.

At the launch of the program, host a workshop or a “lunch and learn” event to walk everyone through the policies and how to refer people. Make sure you’re reaching out to everyone in your office with referral opportunities, including female and minority employees. The program might benefit from having a structure that rewards diverse referrals; one strategy could involve increasing referral bonuses for candidates who are underrepresented at your company.

In the end, aim to offer rewards that employees actually want. Cash bonuses are a popular choice, but don’t overlook the value of paid time off and gift certificates, as well as providing options. The U.S. Department of Energy sets its maximum bonus at $500, but it also offers an alternative of 16 hours time off, for example. You might also try to boost participation by offering separate awards for employees who give the most referrals or whose referrals get the highest percentage of interviews, even if those candidates aren’t hired.

An employee referral program can be a powerful addition to your talent acquisition strategy. As long as you maintain open lines of communication and don’t overcomplicate the program, employees will be able to take an active role in ensuring your company’s workforce is the best it can possibly be.

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